10 investing rules for the coming bond crash

Commentary: Warning: Your bond funds could lose 25%

SAN LUIS OBISPO, Calif. (MarketWatch) — “The best piece of advice I could give long-term investors today is don’t own bonds. And if you do own them, you probably ought to move out of them,” warns Charles Ellis, acclaimed author of the classic “Winning the Loser’s Game: Timeless Strategies for Successful Investing.”

Sound familiar? You bet. Ellis’ warning came during a CNN/Money interview with Penelope Wang, just one month after the cover of InvestmentNews was screaming the same warning in huge bold type: “Tick, Tick ... Boom!”

In that “special report on the impending crisis in the bond market,” InvestmentNews the newspaper of record for 90,000 professional advisers, I-News was predicting a “bond bomb” will explode, asking rhetorically: “What will your clients’ portfolios look like when the bond bomb goes off?” Answer: Bonds will crash, with huge loses.

When the Fed raises rates, your bonds could lose 25%

Here are the numbers: “Right now the Federal Reserve is set on keeping rates down,” explains Ellis, because “the yield on a 10-year Treasury bond is under 2%. When yields go back to their historical average of 5.5%, an intermediate bond fund could go down 25% in value.”

Remember that warning when Bernanke and the Fed signal the next rate increase, because it is coming. And sooner than you think. But unfortunately, Wall Street insiders, 90,000 advisers and America’s 95 million Main Street investors with trillions in retirement accounts are in denial of that highly likely event ... why else are the warnings getting so loud?

What happens after the crash? Investors will get hit hard: Ellis says “people who are putting their retirement money into [so-called] safe-bonds can get hurt badly,” echoing I-News warning “when the bond bomb goes off.”

Forget individual stocks, buy index funds

Wang then asked: “So they should be buying stocks?” Ellis was emphatic: Not stocks. “They should absolutely invest in a low-cost index fund ... forget about stock-picking.”

Why no individual stocks? Very simple: The fact is that most investment advisers are losers. Or as Ellis more delicately puts it: “Most active managers underperform because of the fees.” In fact, 80% of all investment advisers lose money for their clients because “after fees, their returns end up being below the market.”

Yes, they are losers. They are losing their investors’ hard-earned retirement money. Solution: Investors should switch to index funds to save 30%. But year after year they remain in denial and just keep throwing away their hard-earned retirement money.

Most financial news is misleading. Why? Because it helps market insiders, the pros with itchy fingers who love short-term trading. They’re different from you and me. They spend all day tracking the markets with their sophisticated algorithms that think in milliseconds.

In time, most of them get it wrong: How else can you explain why in the first decade of the 21st century Wall Street has already triggered two $10 trillion crashes, two long recessions and an inflation-adjusted 20% market loss for Main Street’s retirement portfolios? And yet Wall Street’s cheerleaders just keep distracting investors with predictions of perpetual bull markets, ignoring the fact that we’re in the fifth year of an aging bull.

10 rules: Winning the loser’s game is no sell-bonds one-trick-pony

Main Street’s long-term investors need to look elsewhere for support. And one of the best sources for rational investors is Charles Ellis’s classic, “Winning the Loser’s Game: Timeless Strategies for Successful Investing,” which is coming out with a sixth edition soon. Ellis originally wrote it in the mid-1970s.

Via Bloomberg News

Charles Ellis.

The legendary management guru Peter Drucker calls it “the best book on investment policy and management.” And Jack Bogle credits Ellis’s book as the inspiration for his first index fund at Vanguard in 1976.

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